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PPOP/earnings miss led by NIM contraction and higher opex

HDFC delivered lower-than-expected core PPOP and earnings (9% & 11% miss respectively) despite an in-line loan AUM growth (3% qoq/17% yoy) on account of sequential NII decline (NIM contraction) and higher opex. Asset quality improved further in both IL and non-IL segments on account of sustained strong collections (incl. the restructured accounts). Both write-off and credit cost were at usual levels.

Growth remains resilient for home loans

The key highlight was sustenance of strong growth momentum in home loans. Individual Loans (IL) disbursements (~Rs420bn - 93% being HL) were up 66% yoy and were the highest-ever in the first quarter of any year. Prepayment rates were stable at 10.2%; IL book growth accelerated to 19% yoy (grew 4% qoq). Growth was seen across locations and income/property segments, and demand/pipeline for home loans remains strong. ATS of home loan originations has been increasing at near 10% p.a. for the past two years. The non-IL book de-grew 3% qoq due to large repayments and resolutions. However, with good pipeline for construction finance and LRD, HDFC expects non-IL growth to accelerate in coming quarters

NII growth to recover, NPLs continue to come down

NII declined by 3% qoq and yoy growth decelerated to 8% as CoF rose faster than portfolio yield. HDFC typically converts its fixed-cost borrowings into floating rate using OIS, to align with the floating profile of loan assets. However, re-pricing of loans is slower than borrowings due to a 3-month, and this impacted NIM in Q1 FY23. For incremental loans, the co. has shifted to monthly reset of loans. This along with backbook re-pricing should pull-up NII growth over coming quarters. In abs. terms, HDFC’s Stage-2 assets were stable qoq and Stage-3 assets fell 4.5% qoq. The portfolio construct improved marginally in both IL and non-IL segments. Avg. Collection Efficiency was 99% in Q1 FY23 in IL portfolio (incl. restructured loans) which is better than pre-Covid times. OTR book stood at 0.77% (~Rs44bn), of which 98% comprise ILs. Reduction in the restructured book has been driven by collections.

Our earnings estimates underwent some upgrade largely due to uptick in growth assumptions. See 16% CAGR in loan portfolio and core PPOP over FY22-24. We continue to believe that merger is beneficial for HDFC and it transitions investors’ holding into a diversified and strengthened combined entity. Retain BUY with 12m PT of Rs314

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